Thursday, March 23, 2006

Part 8 - Hyperwage Theory: The Mispricing of Labor


Table of Contents

Part 2
Part 3
Part 4
Part 5
Part 6
Part 7
Part 8
Part 9
Part 10

Part 12
Part 13
Part 14
Part 15
Part 16
Part 17
Part 18
Part 19
Part 20

Part 22
Part 23
Part 24
Part 25
Part 26
Part 27
Part 28
Part 29
Part 30
Part 32
Part 33

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The Misadventures of the Street Strategist Vol 1 to 13


Hyperwage Theory Part 08

Hyperwage Theory Part 8

Chapter 8: The Mispricing of Labor

The Hyperwage Theory could be the source of extreme ridicule or, the same could be the source of supreme honor for the Street Strategist in the annals of intellectual history. Not bad for a one-man thinking machine of limited talents and unlimited imagination.

I believe the Hyperwage Theory is a concrete, actionable, elegant single-stroke solution to Third World poverty. What is your counter proposal? The status quo? Is this the best our economists can do?

What saddens me is we have economists whose strategies have maximum statistics and minimum analysis. I hate to jump the gun again, but I came across a factsheet by the government with the following analysis:
“Under Scenario 1 where a P78.00 increase in the wage across-the-board filed at the RTWPBs, total cost of production will increase by 9.7 percent. Cost of trading and construction are expected to post the biggest increases of 1.0 percent and 0.6 percent, respectively. Meanwhile, prices of all goods and services will increase by an average of 9.4 percent while cost of personal consumption expenditures will increase by 9.5 percent, above the “normal” inflation. This would mean that in general, if a household member spends 100.00 pesos a day, it could be expected that he or she will now have to spend at least 109.50 pesos a day.
“On the other hand, should a legislated P125.00 increase in the minimum wage be approved this would translate to a 15.5 percent increase in total cost of production with cost for trading products and doing construction likely to increase by 1.6 percent, and 0.9 percent, respectively. Price of goods and services are seen to increase by 15.1 percent, on the average while cost of personal consumption expenditures will increase by 15.2 percent; and
“Finally, if the businessmen’s proposal of at most P30.00 increase in the minimum wage is to be followed, it will increase the total cost of production by only 3.7 percent. Prices of goods and services are to increase by an average of 3.6 percent while the cost of personal consumption expenditures will increase by a moderate 3.6 percent.”

Experts as flunkers
If you have been following the Street Strategist, by this time, you shall have acquired the mindset of never believing the experts at once.
Yes, that’s what I am, a non-believer of experts. As much as possible I don’t accept the experts right away, although I use their judgment as my initial reference point. Being experts, they are almost always right; yet in isolated instances, I discover fresh viewpoints; and in all cases, I learn anyway. It’s a no-loss situation.

So what can you say about the report quoted above which was used as inputs for the wage boards a few weeks ago?

Of course, since you don’t have a PhD, you don’t find anything wrong with it.

As for me, since I am the Street Strategist, I give the report a grade of flat 5.0 (failure). See what I mean? Both of us don’t have PhD’s but we don’t think in the same way. You presume their analysis is correct, while I presume it is wrong. And the burden of proof is on me to prove why they are wrong.

If a college freshman submitted the above analysis, I would have given it a 2.0 but since it was prepared by no less than the highest policy-making statistical and economic body of the country, I give it a flat five.

Analysis paralysis
Why? Wait a minute, you’re asking me why? Come on, guys, if you have read Part 1, Part 2, and Part 3 of this series, it is so obvious why their analysis deserves a flat 5.0, notwithstanding their combined PhDs in economics and statistics. This is the reason why I insisted on an introductory paradigm exposition. With a framework in mind, it is very easy to identify a recalcitrant idea.

I don’t have to be an economics professor to reject their analysis outright.

You still don’t see it? Well, these are the hazards of being an author. Nobody actually reads you.

Okay, I give up on you. I’ll spoon-feed you.

The main reason why the analysis of the PhDs deserves an outright flat five is that their analysis is limited to the expense side of the equation. They did not present an analysis of the revenue side. Their I/O model did not consider the Keynesian multiplier effect, the accelerator effect, and other macroeconomic data that will be affected in the revenue and domestic consumption side.

If the labor cost will rise, the businesses could also increase their selling price anytime. Will the price increase be greater than the wage increase so as to obliterate the latter? Well, never underestimate the Keynesian multiplier. Assuming a multiplier of 5, for every P1 increase in wages, which ultimately will be spent as domestic consumption anyway, it will result in a total income of P5 for the entire national economy. And besides, I’m proposing a hyperwage, not a normal wage increase, so as to obtain a net positive purchasing power above the selling price increase. As I have repeated many times before, all money given to labor will be spent on goods and services and will end up eventually as profits to businesses. Their money has nowhere to go but to the pockets of the capitalists as retained earnings.

Anyway, in other words, the government economists have analyzed only one face of the wage issue but failed to analyze the other side. That is a failure in analysis.

And no, they are not the only ones falling prey to such mind-trap. Almost every businessman, economist or layman I talk to are imprisoned in this inflation-centric, expense-oriented analysis mind-trap.

Don’t worry, I was like that before, until I finally sat down and challenged myself to analyze exactly what happens when wages are raised. I realized many of my fears were based on economic myths including hyperinflation and unemployment.

Yes, these are myths.

Anyway, in my book, any single-faced analysis deserves an instant flat five.

Again, this is jumping the gun. But this is just an example of how much thought I have allocated to the Hyperwage Theory. This theory covers both microeconomics and macroeconomics with equal elegance.

Isn’t it exciting to follow this series? In each issue, we discover a viewpoint about economics that is not emphasized in textbooks. As I promised, you will never look at economics the same way again.

In Part 1 (Strategy of Poverty), I revealed the strategy of poverty unwittingly perpetrated by Third World governments and their economists.
In Part 2 (Hyperwage Theory Unveiled), I unveiled Hyperwage Theory with the surprise feature that the solution to a Third World country’s poverty rests on the country’s valuation of the labor of the poorest of the poor. I argued that domestic helpers should be covered by the minimum wage law, and that they should be paid wages with actual purchasing power.
In Part 3 (Paradigms), I laid out the paradigms needed to appreciate the Hyperwage Theory, and attempted to illustrate that it comes as a direct natural logical and elegant consequence of the same.
In Part 4 (Aimless Strategies), I disparaged the aimless strategies of the World Bank and government economists with their “beating around the bush” solutions and their insistence on an inflation-centric First World economic theory for Third World countries.
In Part 5 (The End of Modern Theory), I described the helplessness of modern economic theory in solving both the economic and non-economic problems of the Third World.
In Part 6 (The Wealth of the Nation), I argued that the wealth of the nation depends on the valuation of its lowliest worker and not on the accumulation of excessive profits by a privileged few.
In Part 7 (Labor as Unit of Currency), I discussed the ineffectiveness of the World Bank’s purchasing power parity (PPP) and proposed to labor-hours as useful unit of currency for international comparison.
In this part, I will illustrate the mispricing of labor in Third World countries using the Big Mac.

PPP trash
Question: Which is the more expensive country Australia or Pakistan? Singapore or the Philippines? US or Thailand?

After trashing the efforts of the World Bank to come up with a useless parameter worth tens of millions of dollars and years of man-hours wasted, I bravely proposed an international comparison program based on labor-hours.
What’s the advantage of my proposal? It instantly creates a sense of magnitude and proportion which is important in any analysis. Is labor in Third World countries mispriced, or particularly, underpriced? Is the wealth equitably distributed? The PPP cannot answer these questions, and yet the answer to these questions are more useful than any answer provided by the PPP.

Big Mac Table
First, I am sure you are familiar with the Big Mac index of the The Economist.
But their analysis of Big Mac data suffers a major defect. They use it as non-scientific indicator of PPP and exchange rate valuation, which I find a useless exercise. So what if the Baht is underpriced to the US dollar? Nice to know but useless. For example, we all know that the Renminbi has been overpriced for a long time. But how does that affect the laborer in Shenzhen?

And so I took the data one step further. I used labor-hours as a unity of currency and used the Big Mac as a comparison.
In Exhibit 4 (Cost of Big Mac in Labor-Hours), I compared the time it takes for a minimum wage worker to buy a Big Mac in their country in their local currencies. This in an exemplification of labor as unit of currency. Then I converted all values to US$ for instant comparison.

Exhibit 4 Cost of Big Mac in Labor-Hours

Big Mac
Min Wage



New Zealand

New York

Hong Kong



South Korea




Sri Lanka



In Australia, in one McDonald’s outlet the cost of a Big Mac (no-add-ons, tax inclusive) is A$3.25 but the minimum wage is A$13.83 per hour. Thus, it takes only 14.10 minutes to for an Australian to buy a Big Mac.

In Pakistan, using Chicken as beef substitute, the Maharajah costs PKR 1.85 while the minimum wage is around PKR 12 per hour. Thus it takes a worker to 15 hours (almost two days) to buy the chicken burger.

The Big Mac in Hong Kong is about HK$12.00 while the wage of the domestic helper is about HK$12.8, thus it takes only 56 minutes for a Filipina teacher working in Hong Kong as a toilet cleaner to buy a Big Mac.

In the Philippines, a Big Mac costs around P80 while the minimum wage is about P39 per hour. Thus, it takes about 2 hours to work for that same Big Mac.

Wait, if a domestic helper in the Philippines which is not covered by the minimum wage law buys a Big Mac, she has to work for 15 hours.

In US dollar terms, the Big Mac in Hong Kong is US$1.54 while in the Philippines it is US$1.46, not much of a difference really.

Hong Kong and Singapore have no minimum wage laws. However, in HKG, maids must be paid a minimum of HK$3,320 per month thereby making it the reference rate.

In Singapore, the wage rates ranges from S$3.00 to S$9.00 while the domestic helpers earn about S$1.7 per hour.

In the US, it takes half an hour to buy a Big Mac. I have gathered data from New York, Chicago, and Minneapolis.

Purchasing Power
Question: Which is the more expensive country Australia or Pakistan? Singapore or the Philippines? US or Thailand?
Hey, guys, watch your answers change. The Third World countries are more expensive.

But then you will cry foul. Because I choose a Big Mac, which is hardly a staple food.

Okay, can we change the good of comparison from Big Mac to oil prices? That should be good because everybody buys oil at the same price, and all the businesses and countries in the world are oil-based.

Do you think the comparison table will change? No, the table will be similar. Third World wages cannot afford world-market oil.

We can conclude that there is no purchasing power in Third World countries because their governments prevent them from acquiring so.

Whose fault is that? Why do the economists fail to share the view of the Street Strategist?

Mispricing of labor
As you can see, the most Catholic and most religious nation on earth does not value its labor quite well. And remember, we have not used the data of the domestic helper who is a virtual non-entity in the country’s labor economics.

Using the above comparisons, there is nothing about inflation, just plain comparison of labor and their purchasing power.
Is it safe to conclude that in Third World countries, labor is underpriced? Remember I said in Part 7, of what use are cheap products if the people have no money to buy them?

Ignoring this question was the fatal mistake of the World Bank’s PPP.

In my talks before large audiences, there’s always one who points out: “But we can’t compare ourselves to rich countries.”
My reply is to show them the Big Mac index that I created, “Do you mean to say, that our laborers should work longer hours to buy the same amount of goods than in First World countries? Are you saying that an Australian has to work only for 15 minutes while we have to work for 2 hours for the same product, and that this is the normal state of things?”

In others words, is mispricing of labor a standard feature of Third World countries that cannot be remedied?

Absurd. Egregiously absurd. Our modern day slavery exists because the government does not realize that its economic policies perpetuate the strategy of poverty.

First vs. Third
Throw away the World Bank’s PPP. Think in terms of labor-hours as a unit of currency. Have you noticed that the rich countries are those that give more purchasing power to its workers?

This is the paradigm or mindset that frames my Hyperwage analysis. There is only one conclusion, and there is no chicken and egg situation.

The rich countries are rich because they mandate a high minimum wage to their workers, which works out as a mechanism to stimulate domestic demand for more goods and services, and also works out as a distribution mechanism for wealth equality.

Are rich countries rich because of highly paid workers, or are their workers highly paid because they are rich countries?

Under the Hyperwage Theory, this is not a chicken-and-egg situation. If you look at the mispricing of labor, you will realize the the labor’s lack of purchasing power prevents the growth of the economy. Why produce 10,000 cars if the workers cannot even afford 500?

Will McDo close its operations in Sri Lanka if the wages in Sri Lanka will be topped up to Singapore or Hong Kong? No, it will not. McDo will still continue to expand. In fact, Big Mac in Sri Lanka is more expensive than in Singapore.

I can imagine McDo saying, “We’ll if you increase your minimum wage to US$5, we can still afford it, but why should we increase our workers’ wages on our own volition? Actually, if your government mandates that amount, we can afford to pay, and we will not evacuate just because of that. But don’t look at us. Look at your own government. They are the ones perpetuating the strategy of poverty.”

Basket of products
I have contacted the staff at Penn World Tables who are keeping track of international comparisons but they don’t have the data I need. So, I tried to gather them on my own. We can do the same labor-hour analysis for Coke, electricity, garlic, Nokia, Sony, and oil prices.

Haven’t you realized that there is only one price for oil worldwide and yet we insist on not giving wages to our workers so that they can afford the same volume of oil for the same amount of labor-hours as a worker in the US?

Hyperwage Theory needs the kind of statistics such as the Big Mac or power rates or gasoline rates comparison to support its conclusions. The ADB or the World Bank could provide such funding.

However, being a one-man thinking machine, I have to satisfy myself with raw logic and analysis. Even without getting the actual data, I can identify what kind of data I need for the Hyperwage Theory, and that alone is enough for me.

I have to go now. By the way, have you noticed something?

Our discussion has become more and more “economic” as against the “non-economic” discussions that populated the earlier parts. This is my way of telling you, the more you dissect Hyperwage, the more you realize that it is well-grounded on economic theory than you initially thought.

And, that my friend, is what makes the Hyperwage Theory powerful, and the Nobel Prize closer to the Street Strategist.

After all, Hyperwage Theory is all about seeing what everybody else has seen and thinking what nobody else has thought.
(Thads Bentulan, June 23, 2005)
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